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DR. V. R. NARASIMHAN

WORKSHOP ON COMPANIES ACT, 2013 COMPOSITION OF BOARD AND RELATED

PARTY TRANSACTIONS

Committed to improve the financial well being of people

Trust, respect and care

for the individual

Passion for

excellence

Teamwork Integrity Customer focused

culture

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New Companies Act - Current Status of Implementation

• The Ministry of Corporate Affairs has notified 183 new sections, all Schedules of Companies Act 2013 to be effective from April 1, 2014.

• There are 470 sections in the New Companies Act; with this notification 283 sections will be in force and 187 sections are to be further notified.

• The sections to be notified relate to National Financial Reporting Authority, National Company Law Tribunal, Investor Protection and Education Fund, Compromise and Arrangement, Oppression and Mismanagement, wind up, Sick companies, special courts and sections that refer to these topics.

• Majority of these sections are not notified due pending case in Supreme Court with respect to formation of National Company Law Tribunal.

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Board Composition (Section 149)

• Minimum 3 / 2 / 1 directors in Public / Private / One Person Co.

• Maximum 15; more than 15 with Special Resolution

• Atleast one woman director

• Atleast one director should have stayed for atleast 180 days in India

• One year time given for compliance

• For Listed Companies:

o A Listed Company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed

o At least one third of the Board should be independent

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Independent Director (ID)

Who is an Independent Director - Section 149 (6)

• In the opinion of the Board is a person of integrity and possesses relevant expertise and experience

• Not a promoter of [Company] [Company = Company, holding, subsidiary or associate]

• Does not have a pecuniary relation with [Company] in the last 3 years

• None of his relatives have a pecuniary relationship with [Company]

• By himself or relatives were Key Managerial Personnel or employee of the [Company] in preceding 3 financial years

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Independent Director …(contd)

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• Is an employee / proprietor / partner of Auditors / Company Secretary / Legal / Consultant from that has transaction with company amounting to 10% of Turnover

• Holds together with relatives 2% or more of total voting power of company

• Is CEO / Director of NGO that receives 25% or more of its receipts from [Company] or Promoters

• Possesses such other qualifications as may be prescribed

NEW CORPORATE GOVERNANCE norms are aligned with the Act

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Definitions of Associate, Holding & Subsidiary Co.

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Associate Company - Section 2(6) “Associate Company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Holding Company - Section 2(46) “Holding Company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies;

Subsidiary Company - Section 2(87) “Subsidiary Company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

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Other Provisions on Independent Directors

• Shall not be entitled to stock options; entitled to fees; reimbursements and project share (149-9)

• Shall at the first meeting and subsequently every financial year give declaration of independence

• Shall abide by Provisions of Schedule IV

• Shall be held liable only in respect of acts of the Company which occurred with his knowledge - attributable through Board Process and with his consent / connivance or where he had not acted diligently

• Shall not retire by rotation

• Shall be selected from a databank maintained by a recognized body; due diligence to be done by the Company

• Appointment shall be approved by General Body

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Other Provisions on Independent Directors

Resignation of Director (Section 168)

• A director may resign from his office by giving a notice in writing to the company

• The Board must take note of the same and the company must inform the Registrar about it (filing Form 32)

• The director must also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within 30 days of resignation

• The fact of resignation must be noted in the next Board’s Report

• The resignation will take effect from the date of receipt of resignation by the company or the date, if any, specified by the director in the notice, whichever is later

• If all the directors of a company resign or vacate their offices under Section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors and they shall hold office till the directors are appointed by the company in general meeting

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Tenure of Independent Directors

As per the Act • A tenure of 5 years but eligible for reappointment for 5 years by Special

Resolution

• Can be appointed after two terms if a cooling period of 3 years is given

• Reappointment shall be based on Performance Evaluation done by the Board

For Listed Companies as per Corporate Governance Norms • Independent Director serving for 5 years or more to be treated as

independent for one more term of 5 years

• Reappointment shall be based on Performance Evaluation done by separate meeting of Independent Directors

• Performance Evaluation criteria to be disclosed in the Annual Report

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Number of Directorships

Section 165(1)

Section 165(1) of Companies Act, 2013 restricts the maximum number of directorships to 10 in public limited companies

As per Corporate Governance Norms

• To restrict independent directorships to 7 listed companies.

• In case of a whole time director serving in a listed company, independent directorship in not more than 3 listed companies

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Code For Independent Directors – SCHEDULE IV

i. Guideline for Professional Conduct:

• Ethical Standards, objectivity, devote sufficient time

• Refrain from actions that comprise independence,

• Help Company implement best Corporate Governance practices

ii. Role & Functions:

• Independent judgment, objective evaluation of Board Performance

• Scrutinize Performance Management, satisfy don’t controls and risk management

• Safeguard intent of all stakeholders, add-ins, conflict of interest, etc.

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Code For Independent Directors – SCHEDULE IV

iii. Duties:

• Undertake induction, update skills, knowledge, seek clarifications, strive to attend all meetings, participate constructively in meetings

• Ensure Board addresses all concerns and minutes are recorded accordingly, not to intentionally obstruct proceedings

iv. Manner of Appointment:

• Independent process, approval of shareholders, a letter of appointment be given, remuneration, do / don'ts transparently prescribed

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Code For Independent Directors – SCHEDULE IV

v. Reappointment:

• Based on Performance Evaluation

vi. Resignation / Removal:

• Ordinary resolution for removal

• Replacement within 180 days

vii. Separate Meetings:

• Shall meet once a year separately

viii. Evaluation:

• The whole Board shall evaluate Performance of Independent

Directors

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Additional Provisions - Corporate Governance Norms

• Appointment letter of ID shall be disseminated on Company website and Exchange website

• Detailed profile of ID shall be disseminated on Company website and Exchange website

• Companies to provide suitable training to IDs

• Companies to familiarize ID’s of their roles, responsibilities, rights, nature of industry, business model etc.

• Disclose details of training given in Annual Report

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Audit Committee – (Section 177)

Every Listed Company to have an Audit Committee with atleast 3 Independent Directors.

Scope of Audit Committee

• Recommend, appoint Auditors

• Review and monitor independence of Auditors

• Examine Financial statement, auditors report

• Approval of Related Party Transactions

• Scrutiny of Independent Loans / investments

• Valuation of undertakings

• Evaluation of internal financial control / risk management systems

• Monitoring efficient use of funds raised through IPO

• Cause investigations in any matter

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Internal Audit

The new Companies Act which is revamped specially in the areas of corporate governance, audit and internal controls has attempted to plug the gaps seen in the Satyam episode. Internal Audit function has now been given a statutory status with board focus on it.

New Provision in Companies Act (Section 138)

• Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant, or a cost accountant or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

• The Central government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.”

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Board Responsibility - Internal Audit Functions

Section 134 (3) (n)

A statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company.

Code Of Conduct

The independent directors shall:

• Satisfy themselves on the integrity of financial information and that financial control and the systems of risk management are robust and defensible.

Section 134 (5)

The Directors Responsibility Statement shall state that :

• The Directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

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Types of Related Party Transactions (RPTs)

Section 188

• RPTs entered into in ordinary course of business other than transactions which are not on an arms length basis

• RPTs entered into with the approval of Board – by way of resolution passed in a Board Meeting

• RPTs entered into with prior approval of the company by a special resolution

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Related Party Transactions - Act

A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

A related party is a person or entity that is related to the reporting entity

(a) A person or a close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint control over the reporting entity;

(ii)has significant influence over the reporting entity; or

(iii)is a member of the key management personnel of the reporting entity or of a parent

of the reporting entity.

(b) An entity is related to a reporting entity if any of the following conditions applies:

(i) The entity and the reporting entity are members of the same group

(ii) One entity is an associate or joint venture of the other entity

(iii) Both entities are joint ventures of the same third party.

(iv) Two entities are JV and associate, respectively of a third entity

(v) The entity is a post-employment benefit plan for the benefit of employees of

either the reporting entity or an entity related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

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Disclosure Of Policy On RPTs

• All companies to prepare a policy on dealing with RPTs

• Policy to cover:

– criteria to decide as to what is RPT, its materiality

– whether it is at arm’s length

– approval levels for various RPTs

– disclosure level

– benefits to the company

– level of approval for each type of RPTs (Board/Audit Committee/Disinterested Shareholders) etc.

• RPT policy to be disclosed on its website and also in the Annual Report

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Pre-approval Of RPTs By Audit Committee

Companies Act

Audit Committee shall act according to terms of reference by Board of Directors which shall include approval or subsequent modification to RPTs

Proposal in Revised Corporate Governance Norms

• All RPTs to require prior approval of Audit Committee

• Companies to have policy for determining ‘materiality’ of RPTs

• Material RPTs to be disclosed to Stock Exchanges on quarterly basis

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Approval Of RPTs By Disinterested Shareholders

Companies Act

Section 188 of the Companies Act - approval of RPTs by special resolution and related parties to abstain from voting

Proposal in Revised Corporate Governance Norms

• Companies to have policy to determine material transactions

• Materiality threshold: Individually or taken together exceeds 5% of the annual turnover or 20% of the net worth of the company

• All material RPTs to be approved by shareholders through special resolution and related parties to abstain

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Key Managerial Personnel (KMP)

Who is a KMP?

CEO / MD, Company Secretary, Wholetime Director, Chief Financial Officer and such other officer as may be prescribed

Provisions:

• KMPs are officer in default attracting Fine & Improvement

• Every company in the prescribed class should appoint full time KMP (Section 203)

• KMP to be appointed by means of a Board Resolution

• KMP cannot hold office in more than one company at the same time except in its subsidiary company

• Vacancy in the office of KMP shall be filled within 6 months

• Contravention of the above will lead to fine on the company and directors

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Thank You

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

Exchange Plaza, Bandra Kurla Complex, Bandra (E),

Mumbai 400051, India

Tel: + 91 22 26598100/ 66418100

Fax: + 91 22 26598120

Web Site: www.nseindia.com

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